Risk Appetite Back on the Rise for Fund Managers

Fund managers are taking on more risk in anticipation of a “Goldilocks” recovery in the economy, according to the BofA Merrill Lynch Survey of Fund Managers for April.

Optimism about macroeconomic growth is on the rise and investors are more bullish about the ability of companies to increase profitability, according to the survey results. The number of surveyed investors taking “above normal” risk in their portfolios is at the highest since January 2006.  A net 52% of the panel is overweight equities, up from a net 33% in February, and back to the level seen in January. Within equities, investors have scaled back their underweight positions on banks and raised exposure to cyclical stocks.

The number of respondents predicting “above-trend growth and below-trend inflation” has risen to 32% from 21% in March, the highest reading since the question first appeared in February 2008, BofA Merrill noted. Fewer respondents are expecting below-trend growth. Inflationary fears remain subdued and 42% of respondents expect no interest rate hike from the Fed before 2011, up from 38% last month.

“April’s survey shows a growing number of investors envisaging a Goldilocks scenario of above trend growth and benign inflation. The findings are consistent with the view that the U.S. consumer, far from remaining in intensive care, is on the path back to good health,” said Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Global Research, in a release of the results.

Positive Corporate Outlook

Surveyed fund managers are optimistic about corporate earnings, with a net 71% believing that corporate earnings will rise 10% or more over the next 12 months, up sharply from a net 53% in March. A net 42% of respondents believe that corporates can grow their operating margins in the next 12 months, up from a net 27% in March.

While investors have been renewing their belief in the corporate outlook, they have also increased portfolio allocations towards cyclical stocks, the survey found. A net 27% of asset allocators are overweight industrials, up from 20% the previous month, and the percentage of allocators overweight materials rose to 18% from 12%.

At the same time, a net 10% of respondents remain underweight banks this month, down from a net 24% in March. One in six investors is now overweight banks, compared with one in 10 in March.

A total of 197 fund managers, managing a total of $546 billion, participated in the global survey conducted by BofA Merrill Lynch Research with the help of market research firm TNS from April 1 to 8.